All posts tagged equities

“Equities are the only asset class with a reasonable risk-reward,” says Bhaskar Laxminarayan, chief investment officer at Swiss private bank Pictet, which has around US$408 billion in assets under management.

Pictet shifted toward equities in January, he says. “The risk-reward had switched pretty dramatically from the bond market to equities.”

The U.S. is its top pick for stocks, followed by emerging markets, especially in Asia. It has very little exposure to European equities.

After staring down some “fairly major issues,” including the so-called fiscal cliff and deep budget cuts in the U.S., global markets are in a pretty good place, says Bill Maldonado, chief investment officer for Asia Pacific for HSBC, which has $450 billion under management globally.

“The financials and cyclicals represent one of the biggest opportunities out there,” he says, adding that he likes the materials, industrial, energy, bank and insurance sectors.

Citing a lack of fresh ideas and high valuations, many U.S. small-cap mutual funds have stopped accepting money from new investors, but Legg Mason Royce’s $402 million U.S. Small-Cap Opportunity Fund is “still finding things to buy,” says portfolio manager Bill Hench.

The fund is adding exposure to the natural gas sector, although Mr. Hench says he prefers the services side, such as providers of sand for hydraulic fracturing, or “fracking.” Its holdings include U.S. Silica Holdings, Newpark Resources and Basic Energy Services, which all support drilling operations.

Mr. Hench says the beaten-down tech sector offers opportunities because big U.S. companies didn’t go through their normal upgrade cycle during the downturn, and a “tremendous amount of maintenance and upgrades” haven’t been done. “They’re going to have a spending cycle,” he says.

Japan’s equities offer opportunities but further gains resulting from fresh policy moves and heightened expectations of inflation could be limited, says Kwok Chern Yeh, head of investment in Japan for Aberdeen Investment Management, which has $314 billion in assets under management.

“‘Abenomics’ is a nice tailwind for companies generally” but the weaker yen primarily helps companies that produce in Japan for export, he says.

Kwok, who mostly invests on a three- to five-year horizon, says he likes Japanese companies with strong brands that target overseas markets, and prefers industries in which Japan has excelled.

On Tuesday, Thailand’s benchmark stock index was trading at a 19-year high, and the flow of cash into the nation’s shares had pushed its currency, the baht, to a five-year high.

But the rise of the baht, Asia’s best-performing currency this year, also fueled market rumors of government measures to control its rise to protect Thai exporters’ competitiveness, analysts say, and those rumors were among several “excuses” investors found to take profits this week, sending the benchmark stock index sharply lower on the week.

It's time to reduce exposure to equities and get a bit defensive, says Daniel Needham, chief investment officer in Asia Pacific for Morningstar Investment Management, which has around US$149 billion in assets under management.

Defensive assets, in the current interest-rate environment, offer less-than-alluring returns, he says, but investors aren't being adequately compensated for the risk they've taken on in their search for higher yields.

Emerging-market stocks are moderately overpriced, Mr. Needham says, while U.S. stocks look overvalued and aren't priced for good medium-term returns.

“Switching, yes; great rotation, no,” says Victor Choi, head of markets and investment solutions for Asia at Credit Agricole private banking, which has US$47 billion of client assets under management.

Since the financial crisis, Credit Agricole’s clients aren’t putting all of their eggs into one asset class, focusing on allocation strategy rather than chasing trends, a positive shift, Mr. Choi says. What that means is that many are keeping substantial funds in bonds rather than chasing equities higher full bore, he says.

In fact, despite talk of a Great Rotation, institutional allocation to equities also remains low–Credit Agricole has gone only from underweight to neutral, Mr. Choi says. “For this trend [shift to equities] to become more mature, the economic data has to pick up,” he says, adding that China’s recovery is “so-so” and Europe’s is lagging.

In the current environment, where the Federal Reserve has pinned interest rates to the floor and forced investors out on the so-called yield curve, U.S. equities are probably one of the safer investments. After all, going by the Street’s preferred measure of valuation, the forward-looking PE ratio (about 14 on the S&P 500), stocks are relatively cheap, even as just about every major index strikes a fresh all-time high.

We could quibble with the veracity of the PE ratio, but that’s not the point of this post. The point of this post is risk, and if you want to talk about risk these days, you have to go further afield, like junk-rated leveraged loans or financing deals for bankrupt airlines.

Lawrence McDonald, the former Lehman banker who’s made a second career for himself as an author and risk specialist, noted that this year in the bond world, the riskiest loans are performing the best.

Look, we get it. The Dow’s going for a record, and the hot-stocks will probably get it there no matter what happens in Rome or Madrid or Washington, D.C. But it’s at times like these, when just about everybody is convinced that the markets are moving in one direction, that they are most likely to be thrown the proverbial curve.

There are signs that this big run-up is losing steam, beyond the market’s waffling this week. If you pay heed to the market’s own internals, as well as soundings out of the junk bond and emerging markets, you can see the risk trade is losing some steam.

For one thing, look at our earlier posts, here and here, about the warning signs coming out of the high-yield market. “Given their risk profile, high-yield bonds tend to trade a lot more like stocks than investment-grade bonds,” Tomi Kilgore wrote. “Bulls who have enjoyed a nice run over the past few months may not want to tempt fate.”

Goldman: The time to aim those high-pressure hoses at the stock market is now

One of Wall Street’s favorite ideas this year is that the fire hose of investor dollars aimed at the bond market in recent years will soon be redirected toward the stock market. The massive inflows of money, the thought goes, could help drive stocks, even as equities stand on the threshold of new record highs.

Goldman offers its prediction, which is that investors will rotate far too late for their own good. More specifically, Goldman’s chief equity strategist David Kostin writes, watch for 10-year Treasury yields to hit 3.00% before the sluices open wide (the yield today is about 1.97%, at last glance).

If investors knew what was good for them, they would be getting on board the equity train pronto, and not wait until then, Kostin says. But history proves that investors often take their time cluing in to momentous macro-trends like these, to their own detriment. That said, when they do come around, look out.

Is the European equity market's huge rally of the summer justified? And, perhaps more importantly, is it likely to be sustained?

My view is “possibly” and “probably not”, in that order.

Spain's IBEX is up more than 25%, while Italy's FTSE MIB is just a shade under 24% higher from their end-July lows. Germany's DAX bottomed in early June, since when it has surged 18%. Overall, the Stoxx 600 index is up a little under 15% over that same period.

Most of those gains came directly as the result of European Central Bank President Mario Draghi's promise to do whatever is necessary to save the euro. The consensus reading has been that the promise means the ECB will buy bonds from the euro zone's beleaguered sovereigns in sufficient quantity to drive yields low enough that these governments will be able to fund themselves.

Sure enough, Italian and Spanish bond market yields dropped sharply and their equities soared.
Implicit in the equities market reaction was that a considerable amount of euro collapse was built into prices. Not only would an unwinding of the euro zone cause serious near term financial market trauma and economic slump–it's been estimated that economies would suffer considerably more than they did following the Lehman Brothers bankruptcy–but the benefits of monetary integration would be lost. So a decrease in those risks is clearly good for future profits.

Stocks aren’t the only asset rallying today. Gold is near a one-month high. Given the conflicting nature of gold these days — it’s a risk asset or a safe haven depending upon the day — it’s hard to say exactly what that means. Part of it probably reflects a rebound from a steep selloff.

Spot gold traded as high as $1,637/oz this morning, its highest level since May 8. It has come as the dollar has weakened, certainly against the euro. Drops in the dollar usually spell a high gold price, but that’s not the whole story.

Only after Europe accepts the fate of defaults and forgiveness–and not before–will the reset button be hit and the world start growing again.

A Europe facing up to its problems doesn’t look likely right now: As they have for more than two years, Europe’s leaders continue to artfully dodge the cause of their debt crisis that now threatens to drag the entire world back into crisis. The cause: a union with wealth transfer flaws that politicians are unwilling to address.

This is an excerpt from a column I wrote on June 15, 2011, at 8:39 a.m.: “A warning of a downgrade of French banks by Moody’s, and a downgrade of Greek banks by S&P, are jointly setting up the risk of contagion-breeding market reactions that will see the Greek debt fiasco end with a messy default. That would push the EUR/USD to its original triangulation rate of $1.1895.”

Since then, instead of addressing the problems of Europe, Europe’s leaders descended into “pray and delay” mode–a failed policy.

MARKET SNAP: At 5:45 a.m. ET, S&P 500 futures down 0.7%. Treasurys higher. Nymex down at $97.84; gold lower at $1639.20. In Europe, DAX down 1.1% and CAC 40 down 0.7%, FTSE 100 closed for a public holiday. In Asia, Nikkei 225 down 2.8% and Hang Seng down 2.6%.

Watch for: The economic calendar is rather quiet, with just March consumer credit due at 3 p.m. ET.

The Breakfast Briefing

The avengers were active this weekend, and we don’t mean the latex-clad ones up on the silver screen.

One thing is clear in the aftermath of Sunday’s national elections in France and Greece: Austerity is out; anger is in. Voters took to the polls, and they were decisive. These real-life avengers are here, and they are tossing out those associated with the German-dominated austerity crowd.

In France, the challenger, Socialist François Hollande, ousted President Nicolas Sarkozy, whose ties to the austerity crowd didn’t jibe well with the current zeitgeist. In Greece, voters delivered a stinging rejection of the two incumbent parties; they may pull together the narrowest sliver of a majority, but their ability to govern effectively has been hobbled.

This is for some reason taking the market by surprise, but it’s hard to see why. This was all telegraphed well ahead of time.

“We have been writing for months that once the people got a chance to vote on the austerity packages they would turn them down by voting the leaders that signed them out of office,” Robert Hardy of research and consulting firm GeoStrat wrote in a note Sunday.

Now the markets play a guessing game. Will Hollande and Merkel play well together? Will they get a cute nickname, like Merllande? Or Hollkel? Or will the Franco-German alliance disintegrate? Will Greece sink into chaos? Will it drop the euro?

Hardy said in talking with a number of officials in France and Germany, there was a feeling that Hollande would settle down and do what politicians usually do: compromise. Indeed, the Telegraph noted there’s a feeling that Hollande needs partners more than Merkel does. All Hollande has do to, though, is stick a finger in the air and see which way the wind’s blowing.

“If the predictions of demise of the coalition in Greece holds up, we doubt Hollande will shift his pre-election stance on financial policy more than marginally,” Hardy wrote.

The markets have had an easy run since October, amid a stable if volatile backdrop. That backdrop is no longer stable, and it’s been weakening for a good, solid month now. In the end, it isn’t even necessarily “austerity” or “growth” the market’s voting on; it’s stability.

Things don’t look very stable at this moment.

Morning MarketBeat Daily Factoid: On this day in 1946, Masaru Ibuka formed a company out of his radio repair shop in Tokyo, calling it The Tokyo Telecommunications Engineering Corporation. It’s better known today as Sony.

-Paul Vigna

Stocks to Watch

Among the companies that could see active trade in Monday’s session are Dish Network, Sysco and Tyson Foods.

Dish is slated to post first-quarter earnings before the opening bell. The average estimate of analysts polled by FactSet Research is for the company to earn 70 cents a share on revenue of $3.62 billion.

Sysco should earn 43 cents a share on sales of $10.45 billion if Wall Street’s best estimate is on the mark.

Tyson will record a profit of 39 cents a share with revenue of $8.47 billion, according to analyst estimates.

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.